The Federal Reserve Meets To Review Rates
Monday, December 15, 2008JEFF YASTINE: it sounds like a typical meeting of the Federal Reserve's open market committee -- started today, with interest rate results tomorrow. But this meeting is anything but typical. That's because the key short-term interest rate the Fed sets is expected to be near zero. Darren Gersh reports on what we can expect from these unusual days at the Fed.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Normally a story like this would pretty much focus on where the Federal Reserve is going to peg interest rates at the end of its two-day meeting. Let's end any suspense now. Tomorrow the Fed is widely expected to set its official target for short-term interest rates at 0.5 percent. That's the target, but in the market, former Fed staffer Vince Reinhart says the actual rate will be about zero.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: So the Federal Reserve is out of the interest rate game, but it's not out of business. It can still affect the economy by increasing the size of its balance sheet.
GERSH: We'll get to that balance sheet in a minute. For now, realize that for banks that are making loans, interest rates at or close to zero usually mean falling profits. And for retirees and others on a fixed income, a 0 percent interest rate means less income. On top of that, economist Bob Brusca fears the Fed is re-inflating the bubble in the mortgage market.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT & OPINION ECONOMICS: I just keep seeing that old science fiction movie "Lost in Space" with the robot going danger, danger, will Robinson. I just see that all over the place when I think of zero interest rates.
GERSH: Most economists are not so alarmed. Many think it's time for the Fed to signal it will be getting very aggressive, which is where that balance sheet comes in. Reinhart explains expanding the balance sheet is a fancy way of saying the Federal Reserve is using its credibility in the markets to print money and buy up stuff -- from credit card debt to student loans.
REINHART: The Federal Reserve has gradually - or not so gradually - it's really in the space of seven months significantly increased its role in our economy by being the buyer of last resort.
GERSH: Does this mean we'll all be getting super cheap loans in the coming months? Financial planner Glenn Kautt says no. Many banks still have too many of their assets in a sinking housing market and Kautt says there is only so much the Fed can do to address that crisis.
GLENN KAUTT, PRESIDENT, THE MONITOR GROUP: So until that problem is solved, for you the consumer, to borrow money, whether it's with a credit card or whether it's for a house or whether it's to have inventory for your plumbing supply store, there's really no relief.
GERSH: Fed officials would likely disagree. Tomorrow's meeting could end with a signal the Fed will keep money cheap and provide enough of it to bring the economy out of its free fall. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
